My best friend and I have enough cash to start investing in real estate and buying properties with no financing. However, another one of our best friends owns a property management company and also wants to be involved. He has offered to do all the legwork of finding the property, renovating it and selling it etc. We would therefore be acting as hard money lenders and his proposition is to split the net profit 50/50. We wanted to know if this split is normal for this type of set up? 50% sounds like a lot since we will be putting up 100% of the cash. However, this might be normal in the industry and we would like to have some idea before jumping in. I know it will be a lot of time and work just finding and bidding on properties. If anyone else has any better ideas please chime in. Thank you. 

Originally posted by @Daniel Rojas:

My best friend and I have enough cash to start investing in real estate and buying properties with no financing. However, another one of our best friends owns a property management company and also wants to be involved. He has offered to do all the legwork of finding the property, renovating it and selling it etc. We would therefore be acting as hard money lenders and his proposition is to split the net profit 50/50. We wanted to know if this split is normal for this type of set up? 50% sounds like a lot since we will be putting up 100% of the cash. However, this might be normal in the industry and we would like to have some idea before jumping in. I know it will be a lot of time and work just finding and bidding on properties. If anyone else has any better ideas please chime in. Thank you. 

Daniel,

Why not three ways (1/3 each)?

Also I don't know your friend but I would still do due diligence (past performances, style of rehab, quality of rehab, etc.) on him and his work. No offense, but this is business. Everything should be spelled out completely. 

Let me pose this to you, is he a Realtor? When he says he will sell, is that by way of FSBO ? If he is a licensed Realtor, is he going to split the commission? If he decides to obtain a Realtor, who's portion will that expense come from... I mean he is saying net but he is also offering selling the property which in my book is a commitment.

This is just one area which needs to be covered. Everyone's duties need to be outlined. Are you experienced? Is your other initial friend who wants to partner with you experienced? Are you all going to vote on which property is approved or will he have total authority in purchasing property? Property management companies typically range between 8%-10% in fees... Why does he want 50%, leaving you two to split 50% (25% each)? 

These are just some things to think about.

Before you make a commitment completely, write it out, maybe do one deal if your due diligence checks out and then decide if it is right to form a team/partnership.

It can be exciting but take the emotions out of it and structure this like a business. Maybe you trust him. Maybe he is good looking. Maybe he is funny. It means nothing when it comes to the nuts and bolts of a partnership. Friendships can sometimes kill relationships when conducting business with one another.

So think before you sink. However, he may be the exception.

Maybe I wrote too much on here, Lol.

Just my two pesos.

Big Henry

@Daniel Rojas  @Henry M.  

 Hello Daniel,

  I was going to chime in on this one but Henry M already provided some great advice on this!

@Henry M. That's exactly what we said, why not 33.33% all around? We are both new to REI but have done a lot of research and are ready to begin. We were thinking of doing everything ourselves before being approached by our other friend. My property manager friend has some experience in renovations because he does this for a lot of the associations he manages. However, he is also looking to diversify his property management business and start flipping with other peoples's money for now. Yes, he does have a realtor's license and commission will be added to net profit. We will be very involved as we want to learn as well and will have final say on everything. All terms will definitely be written down and agreed to prior to commencement. I totally agree with your final statement and losing a friendship is the last thing we want to do. We were thinking of counter offering and asking for 1/3 split but wanted to post this question on bigger pockets before we do. Thank you so much for your input.

Well if you form an LLC., he can have 34%... With you and your other friend taking 33% each.

But he definitely could be an asset. But I would still do one deal first and then go from there. Again everything in writing. Draw up an MOU (it's like a gentleman's agreement) to kind of feel out how this potential partnership may go. If all goes well, especially after the first deal then proceed to locking up the partnership.

Because there are three of you, this is the reason a 50/50 will not be beneficial to all involved. However, everyone needs to pull their weight, no doubt.

But DO your DUE DILIGENCE on him, regardless. Being a property manager is easy work. The trick is to screen potential tenants correctly and manage people not property. Finding a good deal and being a rehabber takes a lot of experience and skill. I'm sure guys like myself, Will Barnard & J Scott can attest to this.

If he rejects the offer, then maybe it is best to move on.

Let me know how you progress.

Just my two pesos.

Big Henry